In the 1861 Charles Dickens classic Great Expectations, Pip’s financial rise from impoverishment occurs as a result of his great expectation of wealth from visiting Ms Havisham’s house. After becoming the heir of an unknown benefactor and the recipient of great expectations, Pip spends many years searching for his benefactor’s identity. At first, he believes that Miss Havisham is the benefactor. But when Pip discovers that she is not, he is left disappointed and realises that great expectations are often not how reality is.
So, what does Pip’s great expectation have to do with superannuation?
Importantly, Pip reminds us of the great expectations many Australians have about their retirement. As one recent study reveals, great expectations of retirement are adversely affecting people’s ability to plan for retirement. Inaccurate expectations early on interfere with retirement plans and prevent people from maximising their opportunity to plan for a desired retirement lifestyle. The greater the inaccuracy, the greater the disappointment in retirement.
Disappointment due to over-optimism can be particularly hard to overcome post-retirement. This is because any plans for a particular retirement lifestyle is more likely to be achieved during the accumulation stage.
With the old-aged dependency ratio increasing, over the next two decades, great expectations of retirement will pose substantial challenges. For this reason, governments and superannuation funds have a collective responsibility to act now, to design and implement effective retirement policies and products for supporting Australians with their retirement.
Great expectations of retirement
Seeking something out of nothing is part of human nature, more so when the trait is coupled with the strange persistence in believing that it is possible. People instinctively want to save for the future in ways that allow them to spend their money now. Unfortunately, often the two are impossible to balance, which is why many end up spending their money now without any realistic plans for retirement. As the Global Investor Study 2018 (the study) reveals, this is particularly the case with many Australians.
More than 1,200 Australians participated in the study. The participants provided details of their expectations of retirement in areas of retirement spending, retirement income, retirement savings and investment in retirement. The results show just how wishful Australians are when it comes to expectations for retirement compared to what retirees experience in retirement.
One of the biggest misconceptions Australians have about retirement is how much of their retirement savings will be spent on living expenses. Those who are yet to retire expect to spend 39 per cent of their retirement income on living expenses; whereas retired people spend around 58 per cent of their retirement income on living expenses – not including healthcare or travel expenses.
In a country that has one of the highest living standards in the world, the gap of nearly 20 per cent is a major concern. That means many Australians are currently saving 20 per cent less than what they may require for living expenses in retirement.
Australians who are aged 55 and over expect they will need on average 71 per cent of their current salary or income to live a comfortable retirement. However, those retired are currently receiving only 52 per cent of their final salary per annum – again, a gap of nearly 20 per cent.
Despite feeling the need to save on average 15 per cent for a comfortable retirement, working Australians are currently saving 12 per cent of their income. While the discrepancy is only three per cent, the gap is nonetheless concerning given that at least 9.5 per cent of the 12 per cent savings comes from compulsory contributions.
Investing in retirement
Australians continue to invest their wealth in retirement. Those who are yet to retire plan to dedicate on average 13.3 per cent of their retirement savings to continued investing; whereas those retired are allocating nearly 19.1 per cent of their pension savings to investment to fund their retirement needs.
In the case of millennials, expectations for retirement is even more unrealistic. Millennials expect to spend only 27 per cent of their retirement income on living expenses – that is a gap of 31 per cent between expected expenditure and what retired people spend.
The gap is particularly concerning because millennials have the longest opportunity to make the most impact on their retirement outcomes. Yet this is not the case.
So why is there such a gap between people’s expectations of retirement and retirement in reality; importantly, what can be done to narrow the gap?
Fatalistic view of superannuation
Lack of engagement with superannuation is one of the main reasons why many Australians have great expectations of retirement.
For instance, a survey of Australians aged 25 – 44 years old conducted by Galaxy Research in 2012 found that 60 per cent of participants described superannuation as ‘baffling’, ‘boring’, ‘difficult to understand’ and ‘for people older than me’. Only 25 per cent thought superannuation was ‘interesting’ and ‘motivating’. One would hope that these figures would improve over the years as superannuation became more significant in Australia. Unfortunately, this is not the case.
A recent study by Finder has revealed that only 42 per cent of Australians know their superannuation account balances – ironically, the majority of these are younger people who are least financially secure. Only 37 per cent of Generation Y know what their current superannuation balance is: 11 per cent do not remember, seven per cent do not bother to check and six per cent do not know how to check.
The Study by Finder has also revealed that there is little planning for retirement even by those approaching retirement. Less than 10 per cent of retirees develop a formal financial plan prior to retirement. Those who do develop a plan do so at the time of retirement, not prior to retirement. As a result, many are either unaware of how superannuation works or willingly opt out of active participation.
One does not need to travel far to understand why people have a lax approach to superannuation. Given that superannuation accounts are long-term savings accounts, their relevance in the lives of Australians is minimal compared to everyday bank accounts. The perception that superannuation balances are inaccessible is why many see superannuation as insignificant. It is this false perception that fosters a culture of lax attitude of superannuation, and it needs to change.
A new perception of superannuation
To change people’s lax attitude of superannuation, there needs to be interdependence between people and their superannuation accounts. One way of creating this interdependence is to promote accessibility of superannuation balances as investment and savings, rather than expenditure only.
If the perception of accessibility can be transformed from expenditure only to investment and growth, the interdependence between Australians and their superannuation accounts will increase. This will compel people to become more involved with their superannuation accounts and develop a positive mindset and genuine desire to make retirement a great experience.
Of course, active engagement with superannuation alone is not adequate. Australians would also need to be empowered with the necessary tools, including financial literacy and effective products.
Empowering Australians with super financial literacy
Financial literacy for developing a successful retirement plan does not require a person to have a degree in finance or economics. Effective financial decisions in relation to allocating assets in superannuation investment options, determining saving rates and negative returns, making voluntary contributions to maximise retirement savings, creating a self-managed superannuation fund (SMSF) plan, or consolidating multiple superannuation accounts, can all be achieved with basic financial knowledge.
Increasingly, Australians are required to interact with complex superannuation accumulation and decumulation products. For example, while direct investment options are designed to provide people with greater control and flexibility over their superannuation savings, they can also be quite complicated, especially for those who do not have basic financial literacy.
How will a person interpret investment results and adequately consider their options without basic financial literacy?
That is why education is key, and governments and superannuation funds have an important role to play in educating Australians on how to develop and execute their retirement plans, especially from an early age.
Indeed, financial literacy from an early age will not only afford basic skills for managing investments and savings but will also promote a culture of financial awareness. Young Australians will be empowered with the knowledge of responsible financial management. In the words of Senator Judith Adams: “If superannuation and other financial management issues were addressed at a middle or high school level, it is anticipated that school leavers would graduate with at least a basic level of awareness about savings and retirement income.”
For those not of school age but under 40, superannuation funds need to consider their role in improving their members’ financial literacy, especially through information provided to members in the form of annual member statements, brochures, seminars, and website or marketing content.
Currently, more than half of the information communicated to members by superannuation funds does not get read; members want to access information that is relevant and understandable.
Basic financial literacy can also be extended to those who are in transition to retirement and those already retired. As post-retirement investment becomes the new trend, superannuation funds should also take the opportunity to increase their retired members’ financial literacy and awareness, especially on how to use post-retirement investment products and their associated risks.
Superannuation products – less and simplicity are best
In addition to empowering Australians with financial literacy, the development of efficient superannuation products in consultation with members would greatly assist them in planning and executing their retirements.
Currently, in developing superannuation products, such as direct investment options, superannuation funds do not adequately consult with or educate their members on how the products are designed to work. As a result, many end up not using these products at all, or those who do use them find them complicated and unhelpful.
A recent report published by Industry Super Australia also suggests that superannuation funds that proliferate their members with investment products underperform than those who offer a limited range of simple investment products.
Therefore, it is evident that members would benefit from simplified product structures and fewer investment options.
It is also time for superannuation funds and governments to step up and create effective post-retirement products to support people during retirement and deliver income streams to retirees. The delivery of post-retirement products will not only ensure the necessary cultural shift for people in the accumulation stage but also provide retirees with a new source of income.
In fact, superannuation funds should be able to offer or default members into investing post retirement. This will not only help members to start thinking about investing through retirement but will also send a wider message to the community about the financial realities of retirement.
The Comprehensive Income Products for Retirement (CIPRS) initiative is already tilting the retirement phase or decumulation of Australia’s superannuation system towards the provision of retirement income. Of course, there is much to be done with CIPRS, including addressing the issue of proportionality of investments of balances and participation; however, it is comforting to see that such products are already being developed.
When Charles Dickens originally wrote Great Expectations, he succumbed to an audience desperate for some optimism and hope that their own great expectations may one day become a reality.
There is a real danger with the way many Australians are approaching their retirement planning, especially in the current environment of slow wages growth, lower returns, and increasing inflation. In the face of Australia’s aging population, great expectations for retirement without realistic planning can have a devastating impact on the future of Australia’s fiscal outlook.
Of course, the responsibility of making decisions in relation to the management of superannuation savings and accumulation rests with each person. However, to fulfil this responsibility, Australians need support, and superannuation funds and governments bear a collective responsibility to transform people’s view of the superannuation system and empower them with effective tools for retirement.
Arthur Marusevich, lawyer